Owners' Equity
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Owners' Equity
Nichole Caruthers
423
April 13, 2015
Raymond Ho
Owners' Equity
Paid in capital and earned capital are two entirely different informational tools used by executives as well as investors when determining how profitable businesses are. Though both earned and paid in capital raise the value of the company, both must be kept separate to allow proper evaluation of the company's owners' equity. As an investor, both types of capital are necessary though one or the other will give different insights into how the company comes across its money. Earnings per share is also a ratio that is evaluated before investments have been made. Basic or diluted earnings per share are again very different and are evaluated separately. The importance of each type of capital and ratio of earnings per share will depend on the reason for the evaluation. And individual's view will be somewhat different than an executive in that the individual is a potential investor for that company (Kieso, Weygandt, & Warfield, 2013).
Both paid in capital and earned capital are reported on the owners’ equity portion of the financial statements. To understand why they are separate one must first know what the difference between the two types of capital are. Earned capital refers to the retained earnings which is income that the company has accumulated since the date of inception. Paid in capital then refers to cash paid in during the purchase of shares by investors. Once these concepts are understood, the reasoning capitals are reported separately become apparent. Investors and the companies must be able to track and measure accumulated income over time in order to self-finance and cover any losses the company might have. Earned capital may also become negative if losses are sustained over long periods of time that exceed accumulated earnings. Once companies have found a deficiency, they may adjust finance and operating activities to accommodate the retained earnings. Another use for...
Nichole Caruthers
423
April 13, 2015
Raymond Ho
Owners' Equity
Paid in capital and earned capital are two entirely different informational tools used by executives as well as investors when determining how profitable businesses are. Though both earned and paid in capital raise the value of the company, both must be kept separate to allow proper evaluation of the company's owners' equity. As an investor, both types of capital are necessary though one or the other will give different insights into how the company comes across its money. Earnings per share is also a ratio that is evaluated before investments have been made. Basic or diluted earnings per share are again very different and are evaluated separately. The importance of each type of capital and ratio of earnings per share will depend on the reason for the evaluation. And individual's view will be somewhat different than an executive in that the individual is a potential investor for that company (Kieso, Weygandt, & Warfield, 2013).
Both paid in capital and earned capital are reported on the owners’ equity portion of the financial statements. To understand why they are separate one must first know what the difference between the two types of capital are. Earned capital refers to the retained earnings which is income that the company has accumulated since the date of inception. Paid in capital then refers to cash paid in during the purchase of shares by investors. Once these concepts are understood, the reasoning capitals are reported separately become apparent. Investors and the companies must be able to track and measure accumulated income over time in order to self-finance and cover any losses the company might have. Earned capital may also become negative if losses are sustained over long periods of time that exceed accumulated earnings. Once companies have found a deficiency, they may adjust finance and operating activities to accommodate the retained earnings. Another use for...